The second quarter bank results were expected to reflect the continuing slowdown in credit growth, pressure on margins (partly as a consequence of the low growth and partly because of high-cost deposits) and a rise in non-performing assets (NPAs). Now that all the results are out, how have they fared?
Loan growth has been pretty good, at more than 20% for most banks. The big divide has been between the state-owned banks and those in the private sector, with loans increasing by 53% for Axis Bank, 45% for HDFC Bank Ltd and 33% for ICICI Bank Ltd, compared with the year-ago period. Most of the state sector banks had credit growth rates of between 20-30%. Retail lending has slowed sharply.
It’s difficult to generalize about deposit growth because it outstripped rise in credit in some banks, while in others, it is lower than credit growth. But what is clear is that there has been a decline in the CASA (current and savings accounts) as a proportion of total deposits. As a result, net interest margins have been squeezed for most banks. Those banks that had raised funds, however, have been exceptions. Their cost of funds has come down, on the one hand, and they have been able to lend more, on the other. The net impact can be seen in the growth in net interest income, where banks such as HDFC Bank, Axis Bank and ICICI Bank have been able to grow at 44%, 61% and 26%, respectively, while the state-owned banks’ net interest income growth has been in the single digits. State Bank of India’s year-on-year growth in net interest income, for instance, has been just 6.3%, despite good growth in advances. The difference between the private and public sector banks is also brought out from the much higher growth in profits after tax for the latter category. Treasury income has provided a big boost to several public sector banks, enabling them to post good profits after tax despite lower core operating profits. While bad loans have increased, they are yet to become a major concern for any bank, although those who had bet big in the retail space have seen a rise in NPAs. The BSE Bankex has gone up by around 34% since the beginning of Q2, slightly outperforming the Sensex. The story is a simple one—with the Indian economy growing so fast, banks are a play on that growth. But the September quarter results show that credit growth is not enough for betting on banks—margins are equally important.
Why is PetroChina Co. Ltd valued at more than $1 trillion (Rs39.3 trillion)? Simply put, it’s a question of supply and demand. The company’s free-float or the number of shares available for trading on the mainland Chinese market is just 2%—the rest is held by the government. The upshot: a huge mismatch between demand and supply for the stock.
It’s the same logic that lies behind a sudden reversal in fortunes of the Indian government, which has seen the value of its holding in MMTC Ltd and National Mineral Development Corp. soar by more than 10 times since July, from Rs43,200 crore to Rs4.49 trillion currently. Minority shareholding in MMTC and NMDC is just 0.67% and 1.62%, respectively. MMTC now trades at a price-earnings ratio of 1,600 times, and its market value is 25% higher than the value of Infosys Techologies Ltd and Tata Consultancy Services Ltd put together.
A UK blog, macro-man.blogspot.com, puts the bizarre valuations in perspective. Let’s assume, says Macroman, you borrowed a pound from a friend. Rather than repay him in cash, you offer your friend a small share (say 1/500 billionth) of a new company you have created. If your friend accepts, 1/500 billion of your company is now worth £1 (Rs57.5). Your company will now be worth £500 billion ($1.05 trillion) and share worth £499 billion! That’s the logic behind the trillion-dollar Petrochina valuation.
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